Monopoly Welfare Gains and the Costs of Decentralization

Abstract

One of the most well-known results from the standard micro theory is that competition is more efficient than monopoly. This result seems to be taken for granted in the antitrust policy of most countries. Even if most economists do not question the result, a fervent discussion about the quantitative degree of welfare losses due to monopoly has taken place in recent years. The analysis is largely based on losses of consumer surplus. The social welfare loss (the deadweight loss) arising from monopoly refers to the net reduction of consumers’ surplus, i.e. the excess of the loss of consumers’ surplus over the monopolist’s gain in profits, the latter being regarded as a transfer of income from the consumers. Thus the concept of welfare losses or welfare gains utilized for this purpose totally neglects the distributional consequences of changes in resource allocation. The neoclassical approach to this issue is outlined in Figure 1. It produces an unambigous loss of social welfare from market power and constitutes a forceful case in favour of an antitrust policy (see Rowley 1973).

The author wishes to thank Harold Dickson, Leif Johansen and Ajit Singh for their valuable comments.